WASHINGTON - Startup companies that celebrated the passage of a U.S. law allowing them to solicit investors more more openly say regulators may undercut that move by requiring detailed disclosures of their fundraising.
An 80-year-old ban on advertising private investments ends today, allowing businesses to make public pitches to certain investors. At the same time, the Securities and Exchange Commission is weighing whether to require companies to file advance disclosures of those efforts. Failing to file could trigger a one-year disqualification from selling shares.
Startups say the SEC’s proposal was written with more established companies in mind. The cycle of fundraising at younger companies can be less predictable, relying on chance introductions and pitches at meetings of investors known as demo days.
“The market place is feeling a little unsure and insecure about how to move forward, particularly when they rely on venture fairs and demo days,” said Catherine Mott, a Pittsburgh investor who formerly led the Angel Capital Association. “This flies right in the face of the JOBS Act.”
The JOBS Act, the acronym for the Jumpstart Our Business Startups law, passed Congress in 2012 with the goal of deregulating how emerging companies raise money. The law jettisoned advertising restrictions intended to help ensure small investors aren’t lured into out-sized risks.
For the first time, companies raising money outside of a public offering will be able to advertise that they’re seeking funding. The pool of eligible investors will remain restricted to only those considered sophisticated enough to evaluate the risk, or wealthy enough to absorb a loss. The SEC defines such “accredited investors” as having with annual income exceeding $200,000 or net worth of $1 million excluding a primary residence.
Private offers are the biggest source of funding for small companies. The U.S. market for such securities was $903 billion last year, according to an SEC analysis published in July. The median amount raised was just $1.5 million.
The SEC voted in July to lift the advertising ban. At the same time, it proposed new rules intended to mitigate the risk of fraud created by allowing riskier ventures to solicit investors more directly.